Intel (NASDAQ: INTC) Earnings Are Out, Beats By 7 Cents – Stock Tumbles On Lower Than Expected Q4 Guidance

Usman Pirzada
Posted Oct 18, 2016
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Intel’s third quarter earnings are out and the blue chip manufacturer has reported a revenue of $15.8 Billion with a GAAP EPS of 69 cents and a non-GAAP EPS of 80 cents. The analyst estimates according to Thomson Reuters was 73 cents (IFRS) on revenue of $15.6 Billion which means the company beat on both earnings and revenue. After the earnings release, Intel Corporation (NASDAQ: INTC) shares have started falling (at the time of writing) and the stock is currently down 5.8% at $35.54 a pop in after-hours trading.

Intel Corporation (NASDAQ: INTC) Q3 2016 results are out, EPS of 80 cents on revenue of $15.8 Billion

The company has managed to beat analyst estimates in recent times and keeping with tradition, beat Earnings per Share by 7 cents. It also reported revenue $200 Million higher than the consensus. Interestingly however, Intel (NASDAQ: INTC) has reported guidance for Q4 that is lower than the analyst’s expectation of the same.

There is quite a big difference between GAAP and non-GAAP results (which are usually compiled in accordance with IFRS principles) – 11 cents to be exact. And while on first glance, this might seem like an ominous indicator that is actually not the case. The primary driver in the disparity between the two forms of reporting is the fact that one is adjusted for special charges – specifically restructuring charges that are expected to end in mid-2017. Since these one-time charges are significant in nature (roughly $2.3 Billion in this case) but do not reflect the company’s performance it is usually a good idea to allocate less weight to them while analyzing a stock’s performance. Before we go any further, lets take a look at a snapshot of the company’s performance:

Q3 Key Business Unit Trends

  • Client Computing Group revenue of $8.9 billion, up 21 percent sequentially and up 5 percent yearover-year
  • Data Center Group revenue of $4.5 billion, up 13 percent sequentially and up 10 percent yearover-year
  • Internet of Things Group revenue of $689 million, up 20 percent sequentially and up 19 percent year-over-year
  • Non-Volatile Memory Solutions Group revenue of $649 million, up 17 percent sequentially and down 1 percent year-over-year
  • Intel Security Group revenue of $537 million, flat sequentially and up 6 percent year-over-year
  • Programmable Solutions Group revenue of $425 million, down 9 percent sequentially

Intel  (NASDAQ: INTC) has posted a great quarter. The chip giant has reported a year over year increase of 21% in net income (non GAAP) and margins are an exceptional 64.8% (non GAAP). The Client Computing Group, Intel’s core business unit saw significant grown of 5% year over year and almost 21% sequentially. Data Center and Internet of things saw even bigger growths of 10% and 19% respectively. The only two segments which did not show growth year over year and were actually down were the Non Volatile Memory Solutions Group and Programmable Solutions Group – which is something to be expected considering the enterprise nature of both BUs.

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Our Take

Disclaimer: I own no stock in Intel and/or competing companies and have no plans to do so for the foreseeable future.

I have always been bullish about Intel corporation and this particular iteration of quarterly earnings is no exception. The slump in share price can be attributed to the lower than expected business outlook that the company has reported for Q4 2016. Although considering the fact that we are talking about the company that helped pioneer this industry, it would not be an inaccurate statement to say that the analyst consensus tends to be on the unrealistically optimist side. The low Q4 guidance combined with the ever present fear mongering of the “diminishing” PC industry can be seen as the primary factors behind the price fall.

Intel started up its 10nm factory last quarter and is well under way into the ramp for trial production. AMD’s competitor Zen is expected to arrive very early next year and by that time Intel will already have handsomely clocked Kaby Lake processors that should be able to offer serious competition to the former (all data at this point suggests that Zen will not be a threat to Intel. However it is fair to mention that AMD has demonstrated a custom load that was allegedly faster than an Intel HEDT processor although that remains to be confirmed by third party testing). Also, as we have stated on multiple occasions, in terms of the actual physical process, Intel remains an industry leader, don’t believe analysts which cannot differentiate between the marketing name of a given process and the actual physical node it’s made at.

Intel recently acquired Altera to bolster its custom chip solutions and there also rumors of it being willing to offer foundry services for the fabrication of smartphone modems. As we have previously mentioned, the company is also looking to break into the automotive industry and has partnered up with Mobileye although on this particular count I believe, it has pitched in with the wrong hen (more on that later). All of these things combined make me believe that Intel is as good a choice as any if you believe in the silicon industry in general, and follow the Warren Buffet approach to investing.

Intel Corporation 2nd Quarter 2016 Results Out - Beats Analyst Expectations, Posts Earnings Per Share of 59 Cents

Intel Q3 2016 GAAP Results

Year-Over-YearQ3 2016Q3 2015vs. Q3 2015
Revenue$15.8 billion$14.5 billionup 9%
Gross Margin63.3%63.0%up 0.3 point
R&D and MG&A$5.1 billion$4.8 billionup 5%
Operating Income$4.5 billion$4.2 billionup 6%
Tax Rate21.8%26.9%down 5.1 points
Net Income$3.4 billion$3.1 billionup 9%
Earnings Per Share69 cents64 centsup 8%

Quarter-Over-QuarterQ3 2016Q2 2016vs. Q2 2016
Revenue$15.8 billion$13.5 billionup 17%
Gross Margin63.3%58.9%up 4.4 points
R&D and MG&A$5.1 billion$5.2 billiondown 1%
Operating Income$4.5 billion$1.3 billionup 239%
Tax Rate21.8%20.4%up 1.4 points
Net Income$3.4 billion$1.3 billionup 154%
Earnings Per Share69 cents27 centsup 156%

Intel Q3 2016 Non-GAAP Results

 Year-Over-YearQ3 2016Q3 2015vs. Q3 2015
Revenue$15.8 billion ^$14.5 billion ^up 9%
Gross Margin64.8%63.5%up 1.3 points
R&D and MG&A$5.1 billion ^$4.8 billion ^up 5%
Operating Income$5.1 billion$4.4 billionup 18%
Net Income$3.9 billion$3.2 billionup 21%
Earnings Per Share80 cents66 centsup 21%

 Quarter-Over-QuarterQ3 2016Q2 2016vs. Q2 2016
Revenue$15.8 billion ^$13.5 billion^up 17%
Gross Margin64.8%61.8%up 3.0 points
R&D and MG&A$5.1 billion ^$5.2 billion^down 1%
Operating Income$5.1 billion$3.2 billionup 60%
Net Income$3.9 billion$2.9 billionup 36%
Earnings Per Share80 cents59 centsup 36%

Intel Q4 2016 Business Outlook

Intel’s Q4 Outlook (which is suspected to be the primary cause behind the recent dip in Intel’s stock price) forecasts a revenue of $15.7 Billion with Gross Margin percentage at 63% (Non GAAP) R&D plus Management, General and Administrative expenses to be $5.2 Billion. Amortisation and Depreciation will total $40 Million and $1.5 Billion respectively. Investments et al are expected to yield a net loss of $100 million whereas the tax rate will remain constant at 22%. As far as the one-off charges go, Intel is expected to recognize $250 Million in Q4 2016.

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